Commercial Property – The Impact of a Hard Market on Pricing, Capacity, and Terms

Higher rates, restricted capacity, and tighter terms define today’s Commercial Property market. The market, already showing signs of hardening due to losses from previous years, was pushed into hyperdrive as a result of uncertainty surrounding the COVID-19 pandemic.

Accounts that were once written with a single carrier are now requiring multiple markets and layered policies. Carrier minimum premiums from layered deals are contributing to rates currently up 12% and higher. Reinsurance increases are also causing rates to escalate as well as carrier efforts to retain more of their line in-house as opposed to getting facultative reinsurance. In some instances carriers who used to deploy larger lines on a single risk, say $10M as an example, are now only able to deploy $5M in capacity effectively and cost-efficiently. The higher costs to insure excess/buffer limits now price some carriers too high to be competitive, if they offered a full $10M limit.

Tough Property Classes

Some property classes are being affected more than others. Multi-family pricing is 10-20% higher with deductibles increasing in conjunction with rates. Older frame habitational accounts are taking the brunt of the increase as carriers discover that multi-family locations built before 1970 tend to drive negative loss results.

Hospitality property rates are also increasing by 20-45%. COVID-19 has forced some carriers concerned about potential vacancy, business income, and moral hazards to pull back on providing coverage. Some carriers are requiring additional information, such as business income worksheets, before they make a decision. Various monthly limit of indemnity terms are becoming increasingly difficult to secure, specifically one-third and one-quarter monthly business income.

The lack of markets for high hazard manufacturing classes, including recycling centers, woodworking facilities, sawmills, and pallet manufacturers, is especially challenging, often leaving brokers with little or no room to negotiate.

CAT Losses Drive Higher Rates

Additionally, CAT-exposed property rates are up 15-20% for routine placements with pricing for older, more challenged occupancies/higher demand areas in the 20% and higher range. CAT property with losses rose 40-50% as did tougher accounts previously underwritten by a single carrier, due to capacity restraints.

Estimated Insured Property Losses, U.S. Catastrophes, 2017-2019
2017 46 5.3 $106.5
2018 55 3.0 $50.0
2019 61 2.3 $24.4

Source: Property Claim Services® (PCS®), a unit of ISO®, a Verisk Analytics® company; Bureau of Economic Analysis.

Accurate Property Valuations

With an emphasis on profitability, underwriters are carefully scrutinizing insurance-to-value (ITV), tightening guidelines, and demanding better data to properly evaluate risks. With property valuations being a major concern for carriers, ITV has affected premium even when rate increases are moderate. Risks with losses, poor valuations, and older construction are seeing significant rate hikes. More carriers are offering actual cash value with fewer buy-back options on buildings with older roofs as well as lower limits on barrier islands and higher hazard occupancies.

Certain deductible terms that provided carriers a competitive advantage in softer markets, such as calendar-year named storm and calendar-year hurricane deductibles, are now being removed from renewals. Carriers no longer need to offer these terms as a means to write business. Sub-limits of coverage that used to be “throw-ins,” like wind-driven rain, are now being paired down or removed entirely on an account by account basis.

2020 Storm Forecast

With an above-normal hurricane season forecasted this year by the National Weather Services’ NOAA Climate Prediction Center, time will tell how CAT property rates and capacity are affected. NOAA is forecasting a likely range of 13 to 19 named storms (winds of 39 mph or higher), of which 6 to 10 could become hurricanes (winds of 74 mph or higher), including 3 to 6 major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher). Six tropical storms have already developed in the Atlantic, prompting Colorado State University to adjust its prediction from 16 to between 17 and 23 total storms with seven to 11 hurricanes.

Alternative Solutions

Overall, after several years of record losses, carriers are taking a more conservative approach to underwriting commercial property. Brokers must be more strategic when going to market, which is why All Risks brokers are capitalizing on long-standing carrier partnerships and exploring alternative solutions through:

  • Restructured policies
  • Including additional carriers to fill out needed capacity
  • Customized terms and conditions
  • Deductible buy-downs
  • Parametric options
  • Propriety property facilities
  • Modeling software intel

As rates continue to escalate and capacity declines, the need for communication and coverage education between brokers, retail agents, and insureds is critical. Our brokers can help identify and develop loss-prevention strategies to mitigate loss and improve your client’s risk profile. If a carrier is on the fence about renewing an account, an established loss-control program can be a positive deciding factor. Consult with an All Risks Property Broker to ensure your clients have access to the coverage, capacity, and limits they require. 

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Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.